Fixed-Income ETFs to Own $2T in 10 Years

BlackRock Inc.'s Matthew Tucker said,“The scope of application is so much broader than a mutual fund because investors can think of it as a real-time tool for managing risk and exposure.” Photographer: Tony Avelar/Bloomberg

July 10 (Bloomberg) -- Exchange-traded funds that buy
fixed-income securities may boost their assets more than six-fold to $2 trillion in the next 10 years as they transform the
way bonds are traded, according to BlackRock Inc.

The industry that was ignited by the 2008 financial crisis
has mushroomed to include $302 billion of assets in 550 funds
since the July 2002 inception of the first such ETF, the iShares
iBoxx Investment Grade Corporate Bond Fund, BlackRock Inc.’s
Matthew Tucker and Jennifer Grancio said in a report today.

“It’s really changing how to invest in the fixed-income
market” by making it more transparent and liquid, Tucker, head
of BlackRock’s iShares fixed-income investment strategy, said in
a telephone interview. “The scope of application is so much
broader than a mutual fund because investors can think of it as
a real-time tool for managing risk and exposure.”

Growth of fixed-income ETFs will accelerate as money
managers expand offerings to new debt markets in different
countries, according to BlackRock, the world’s biggest asset
manager. The funds will also benefit from a likely shift in the
average investor’s holdings to include a greater proportion of
debt, the report says.

ETFs typically allow individual investors to speculate on
securities without directly owning them. Unlike mutual funds,
whose shares are priced once daily, ETFs are listed on exchanges
and are bought and sold like stocks. About 20 percent or less of
share movement in fixed-income ETFs results in trades of the
underlying debt, Tucker said.

U.S. Assets

ETFs in the U.S., which now hold $222 billion, may account
for $1.4 trillion of assets within the next 10 years, the New
York-based asset-manager said in the report.

BlackRock’s investment-grade fund, which trades under the
ticker LQD, was the most popular ETF in the three months ended
June 30, attracting $2.56 billion, according to a July 6 report
from IndexUniverse.com. Fixed-income ETFs grabbed 91 percent of
the money flowing into the funds in the period, the data show.

Trading in ETFs is rising as investors seek easier and more
flexible access to the bond market, even as trading volumes in
the underlying securities drop. Corporate-debt securities held
by the 21 primary dealers that trade directly with the Federal
Reserve fell to $43.3 billion as of June 27 from a peak of $235
billion in October 2007.

“Liquidity in the bond market is supplied by
brokers/dealers, and as many of these firms were struggling with
their own financial issues, they pulled back from making markets
in bonds,” BlackRock said in the report. “The credit crisis
served as an inflection point for the fixed-income ETF industry,
and it has never looked back.”